The 35 Most Tumultuous Years in Monetary History:
Shocks, the Transfer Problem, and Financial Trauma

Abstract: The past 35 years have been the most tumultuous in international
monetary history. Nearly one hundred national banking systems collapsed,
many more than in any comparable previous period. The range of movement
in market exchange rates and the extent of the deviations of market
exchange rates from real exchange rates—the magnitude of "overshooting"
and "undershooting"—have been larger than in any previous
period. Similarly, the variability in the ratios of trade balances to
GDPs has been larger than in any previous period. There were massive
asset price bubbles in Japan; in Sweden and two of its Nordic neighbors;
in Thailand, Malaysia, and several other countries in Southeast Asia;
and finally in the United States.

These events—the failures of national banking systems, the
large swings in market exchange rates, the large variability in flows
of national saving across national boundaries, and the bubbles in asset
prices—were systematically related.

This essay applies an analysis based on the transfer problem process
that links changes in the cross-border flows of funds, changes in the
foreign exchange values of national currencies, changes in the prices
of financial securities and real estate in countries that experience
inflows of foreign funds, and prolonged economic booms to explain why
there was so much financial trauma. A central question is whether the
financial trauma resulted because the shocks were larger than in previous
periods, or whether the impact of a shock of a given magnitude on prices
of currencies and prices of securities and other assets was larger because
of difference in the institutional structures and especially the absence
of parities for national currencies.[JEL H87, N10, N20]